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Welcome to Graham's Public Blogs

These  quick commentaries are written by Graham on events and developments in European politics, finance, economics and budgets. They are part of his pro bono work.  Click through to see how you can support this work.

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(Graham has "his cake and eats it" at the 100th Brussels for Breakfast)

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The battle over customs union: the tipping point that may decide the fate of the Brexit war

 141st Brussels for Breakfast – CPD Notes

Graham Bishop/Paula Martín Camargo

323 days to go…always the starting point of the Breakfasts nowadays but the understandable interest in Brexit must not divert attention from the continuing flow of financial services events around the EU. Anything that influences the chances of a good outcome for “the City” must be considered but the minutiae of the Irish border issue can become overwhelming! However, a recurrent theme is the sense of running out of time… not just for Brexit but for the EU’s legislative process in the life of the 8th European Parliament and the current European Commission.

The window for proposing significant new legislation is now virtually closed – realistically until the new Commission takes office in October 2019. However, the Commission is preparing 30-40 legislative adjustments to deal with the risk of a no-deal, hard Brexit across all sectors. [...]

The complexity of the issue of the land border in Ireland – which has put at risk the Brexit talks, -  made Theresa May put forward a handful of options to avoid a hard border along Northern Ireland’s lines, among which a hybrid customs plan with the EU is the most favoured by the Prime Minister herself.

May’s so-called  “new customs partnership” would mirror EU customs rules and collect tariffs on behalf of Brussels on goods ending up in the EU through a very complex method that has been branded “magical thinking” by European officials. But May’s inner Brexit cabinet committee narrowly rejected this model– Eurosceptic ministers deemed it “unworkable” -, which forced the Government to postpone the decision.

This insoluble conundrum might lead Theresa May’s minority Government to collapse: a letter signed by as many as 60 Tory Brexiteers has warned the PM that accepting a customs partnership with the EU would mean she can’t deliver a clean break from the EU, and therefore they may withdraw their support to her Brexit Bill.

May’s options could be boiled down to a choice between “bad and worse,”Bloomberg co-founder Michael R. Bloomberg said, recognising that Theresa May knows that Brexit talks have “gone wrong” and remaining in the customs union after Brexit, of creating a new tailored customs relationship, is the least worst option for Britain after repealing full EU membership. [...]

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9 May 2018

Europe Day 2018

Today – Europe Day 2018 – Graham Bishop has published an update of his “Temporary Eurobill Fund (TEF): 30 FAQs”. President Macron and Chancellor Merkel are searching for “compromise” ideas to put to the European Council to maintain the momentum of deepening the Economic and Monetary Union. The Temporary Eurobill Fund offers a simple and quick solution.

This “30 FAQs” draws together all the thinking and comments from around the EU since the idea began with a working group of the European League for Economic Co-operation (ELEC) in late 2011. It is specifically published on Europe Day to provide a modest – at least initially - concrete achievement to match Schuman’s famous call “Europe will not be made all at once, or according to a single plan. It will be built through concrete achievements which first create a de facto solidarity."

The TEF’s Objectives are simple:

  • Re-enforce financial stability.
  • Provide:  a “safe asset” for banks to reduce the `doom loop’ with their government; a “Risk Free Rate” yield curve to support CMU; a simple savings vehicle for citizens.
  • Build trust amongst states, institutions and citizens to assist a European demos.

The Principles for progress in deepening EMU are clear and include:

  • No mutualisation of debts.
  • Strengthen the post-crisis economic governance system.
  • A proper role for market discipline.
  • Financial solidarity with states that respect the rules yet lose market access.

Read the full proposal here


9 May 2018

Temporary Eurobill Fund (TEF): 30 FAQs

The Temporary Eurobill Fund offers a modest, technical but concrete step that can be expanded progressively into a financial, economic and political structure if circumstances develop propitiously. This author has developed the TEF plan over several years – now comprehensively updated. (All FAQs are listed on page 2 - click on a Question that interests you to jump straight to it).

Follow on Twitter: #TemporaryEurobillFund

Version 1.1

1.What is the TEF Plan?

  • The Objectives:
  • Re-enforce financial stability.
  • Provide:  a “safe asset” for banks to reduce the `doom loop’ with their government; a “Risk Free Rate” yield curve to support CMU; a simple savings vehicle for citizens.
  • Build trust amongst states, institutions and citizens to assist a European demos.
  • The Principles:for progress in deepening EMU are clear and include:
  • No mutualisation of debts.
  • Strengthen the post-crisis economic governance system.
  • A proper role for market discipline.
  • Financial solidarity with states that respect the rules yet lose market access.
  • The Mechanics: TEF is a simple “plainest of plain vanilla” plan:
  • For a common institution created by participating Eurozone states to purchase the under-two year debt issuance of those states.
  • The institution would finance such purchases by issuing its own bills - matching its assets in overall volume and maturity. “Back to Back” market finance for absolute simplicity and transparency.
  • The TEF is a replacement of existing debt, rather than a mechanism to increase debt.
  • Why two years? Nothing magical… (i) Seems long enough to give a state in difficulties time to realise and begin to change before markets cut off access (ii) enough issuance to become a major market sector with undoubted liquidity.
  • The TEF will charge all borrowers an identical interest rate for a given maturity.
  • The TEF’s legal structure would replicate the tried and tested ESM Treaty. It would not require a change to EU Treaties so could be set up very quickly.
  • Governance is inter-governmental – not Communautaire at this stage.
  • If it did not prove effective, then it would cease to issue new bills and most of its bills would have run off within a year, and completely within two years.

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Read the full proposal here


7 May 2018

A bespoke services deal with EU 27: fantasy or reality?

Anyone who thinks that it will be easy for the EU to grant the UK a bespoke deal on financial services needs to understand what the EU27 thinks is at stake. After all, the Great Financial Crash had its European headquarters in the City of London and has resulted in a re-structuring of the EU’s economic governance rules to give a hugely enhanced role for Eurozone bodies such as the Eurogroup. The crisis forced the whole thrust of financial regulation within the EU to move on from “mutual recognition” – pioneered by UK Commissioner Lord Cockfield in the 1990s – to a single Eurozone regulator such as the Single Supervisory Mechanism for the banking system.

However, the UK Government has now revived the concept of mutual recognition especially for financial services. As Brexit Secretary Davis put it: each side would "trust each other’s regulations and the institutions that enforce them.” This may work on the day of Brexit but the Prime Minister raised the issue pointedly in her Florence speech – what happens when we want to diverge? The EU believes it has answered this question explicitly in its published negotiating guidelines “The European Council further re-iterates that the Union will preserve its autonomy as regards decision –making” – meaning the EU27 will decide for itself what it wants to do. This is hardly surprising for a group that is about seven times the size of the UK. [...]

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10 April 2018

Less than a year for an increasingly unlikely Brexit - 140th Brussels for Breakfast – CPD Notes

Now only 353 days until we go over the “cliff” – so the 150th B4B may mark the end of the UK’s EU membership! A lengthy Brexit discussion was inevitable and we focussed on the shape of the deal on the future of EU-UK trade relations, rather than the Withdrawal Agreement or Transition Deal. The seven pages of Guidelines were agreed by the EU27 Heads of Government as part of the Article 50 Council meeting but seem to have had little coverage in the UK – despite their huge significance.

The European Council has now agreed the dates for the next European Parliament elections in May 2019 so the final plenary session of the Parliament will be early April 2019. Any legislative proposals not agreed at that stage are at risk of having to re-start – especially if the new Commissioner on financial services decides to follow precedent and initiate a lengthy review. So the practical deadline for any new legislative proposals is close - May 2018.

Karel Lanoo at CEPS has published a report on the dangers of forcibly moving euro derivatives clearing out of London and splitting regulation away from the single oversight of the Bank of England. He is probably right that the existing proposals would fragment control and raise risks. But could another answer be to centralise it under say ESMA?

Progress on tackling NPLs generated much discussion. The Commission has proposed a four-pronged action package to deal with the stocks of existing NPLs. But there is also pressure to prevent new NPLs appearing – IFRS9 will be a disincentive but the ECB – in the shape of the SSM – has also proposed regulatory measures and the EBA is advising the Commission on the use of prudential backstops.

The issue of benchmarks re-surfaced as the ECB has launched a second consultation on replacing Euribor and ISDA is urging market players to get engaged.  The FCA will cease to compel/persuade banks to submit LIBOR observations after 2021 and it seems that floating rate bonds may well become “fixed rate at the last-published fix” if no solution is found.

We had an enlightening discussion on the recent work of the International Forum of Independent Audit Regulators (IFIAR) – the `IOSCO of audit’. After all the post crisis work on strengthening audit, IFIAR has reported lapses in 40% of the 918 risky/complex situations audits tested last year. Disturbingly, the most common lapse was insufficient challenge of the reasonableness of assumptions. The second was insufficient challenge of management data/reports. What then is the point of an audit? [...]

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29 March 2018

Brexit in a Year? [Probably] not

In 365 days, Britain goes over the cliff edge of departing from the EU – with a 'transition' to unknown arrangements. If regrets set in afterwards, it will be too late as we will have to re-apply under Article 49 - just as any other applicant. When those `unknown arrangements’ become somewhat clearer during negotiations on EU27's seven-page negotiating mandate this summer, “the people” may well look at the implications and decide for themselves whether they want to proceed over the cliff. [...]

  1. State of play of public opinion on Europe 
  2. What do “the people” want? 
  3. Are most of “the people” going to be disappointed by the result of the negotiations? 
  4.  Are “the people” satisfied with the Government’s handling of the negotiations? 
  5.  Are “the people” optimistic about the likely outcome of their vote? 
  6.  Are “the people” focussed on Brexit at this stage? 
  7.  Are “the people” looking for a vote on the deal? 
  8.  Can we change our mind? 
  9.  What do the “political tribes” think?
  10.  How should Europe read a 52:48 decision to remain?
  11.  What would a “1975 repeat” 67:33 decision mean? 

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20 March 2018

“The regulatory treatment of sovereign exposures” Comments by Graham Bishop on BCBS Discussion Paper

This short paper relates solely to the countries that use the euro as their “domestic currency”.  By definition, they are in a fundamentally different relationship with the currency in use in their country compared with all other members of say G10 or OECD. The sovereign states of the Eurozone (EZ) issue their bonds in a currency (i) that they cannot control and (ii) that no single government has the power to instruct the Central Bank to lend it currency to repay its bonds.

This is a constitutionally-entrenched difference with all other major countries where the legislator - with public support – has the power to change legislation and require the central bank to provide monetary finance that can be used to redeem the sovereign state’s bond obligations on schedule.

The discussion paper does not appear to recognize this fundamental - and critical – difference in the nature of the obligations of EZ sovereigns and all others.

This difference has not arisen by accident – it was an integral part of the design of monetary union reflecting the economic history of the participants and the preceding decade or more of very high inflation. In a parallel – and not particularly connected – strand of activity, the 1974 Basel Concordat was being converted into the 1988 Basel I Capital Requirements by the central bankers of the world. [...]

Full article available for Friends and consultancy clients


13 March 2018

Brexit ‘hard facts’ might become insurmountable facts in Ireland - 139th Brussels for Breakfast – CPD Notes

Highlights from the “Brussels for Breakfast” meeting

Now only 381 days until we go over the “cliff” – so the 150th B4B may mark the end of the UK’s EU membership! A lengthy Brexit discussion was inevitable.

Prime Minister May delivered her set-piece policy speech at the Mansion House that had great significance for financial services. On the one hand, she accepted there would be no passporting but on the other hand, called for “mutual recognition” for goods. We had a lengthy discussion on mutual recognition – how it gained prominence in 1992 and the full meaning of Single Market `directives’ being enacted into the laws of each state so that the Commission could launch infringement proceedings if necessary. Nowadays, the supervisory authorities – the ESAs – might take action but the backstop was always actions at the ECJ.

However, this system failed amidst the huge stresses of the GFC and the thrust now is to enact directly applicable Regulations: CRR, MiFIR etc. Coupled with a single supervisor e.g. SSM and a single rule book, financial regulation is well on the way to moving entirely to the European level. Why would EU27 want to go back to the failed system of the 1990s? […]

Key items of the rest of the month:

Theresa May gathered her ‘war cabinet’ at Chequers, the PM’s country house, to try to agree on a single voicefor the Government’s approach to a future trade deal with the European Union. But the model understood to be May’s preferred, the ‘three basket approach’ – under which Britain would in time diverge from some rules while conserving others that would also remain subject to change in future, - had been ruled out from Brussels overnight, as it would breach the bloc’s pledge to forestallcherry-picking. In spite of this categorical negative, the German Chancellor Angela Merkel threw a lifeline to May, suggesting that a bespoke trade deal with the UK didn’t necessarily mean that it was choosing the elements of the single market that suits Britain the most.

The reported agreement among the members of the cabinet, a “managed divergence” based on May’s initial approach, was almost immediately dismissed by Council President Donald Tusk as “pure illusion”, while Irish Taoiseach Leo Varadkar called urgently for a detailed position, saying that the negotiations are at a point “well beyond […] aspirations and principle,” and  top EU negotiator Michel Barnier rebuffed May’s aspiration to be able to reject EU rules during transition.

Barnier outlined the EU’s stance towards Northern Ireland during his presentation of the draft Article 50 Withdrawal Agreement, that seeks to speed up talks: to avoid a hard border in the island that threatens the Good Friday Agreement, "Northern Ireland has to be covered by the Union customs code," he reminded – a plan which had previously triggered a row among British and EU officials and had made Scotland call to be kept as well within the single market. […]

 

Our Brussels for Breakfast and CPD notes are available for Friends 

Full article including our monthly round-up of key items in Brussels available for consultancy clients


8 March 2018

Commission to propose SBBS framework: But Temporary Eurobill Fund is very different – with wider benefits

Politico reported on 14th March that Vice President Dombrovskis plans to propose a legislative framework for Sovereign Bond Backed Securities (SBBS) in May -  fulfilling the commitment made in the May 2017 Reflection Paper. Politico further reports that the EU28 debt managers opposed SBBS at a March meeting – following their unanimous opposition expressed in a June 2017  letter that Politico has now published.

In my paper of 2 February “European Systemic Risk Board (ESRB) on Sovereign Bond Backed Securities (SBBS)” I commented on the ESRB paper and made the point that my plan for a Temporary Eurobill Fund (TEF) is designed to be not just a “safe asset”  for banks but achieve radically different objectives – with much wider benefits  - than the SBBS plan. The luke-warm official support for SBBS was underlined again in a recent Vox paper by Philip Lane – Chairman of the ESRB task force. As he put it “‘ivory tower’ ideas do not always work in practice” and his paper underlines the difficulties. On such a sensitive matter, it seems unlikely that Finance Ministers will overrule the powerful and unanimous advice of their own debt managers about the risks of damaging the financial `blood supply’ of all governments.

I have recently published a consolidation and update of my plan: Temporary Eurobill Fund (TEF): 30 FAQs to illustrate the radically different targets of the TEF that go far beyond the limited objectives of SBBS. The four specific objections to SBBS by the debt managers are analysed below, as well as their comments on “safe assets”. The table below also provides a simple tick-box comparison for other features. [...]

Full article available for Friends and consultancy clients


6 March 2018

Temporary Eurobill Fund (TEF): 30 FAQs

The euro area now has an historic opportunity to cement its stability:  the run of elections in the past couple of years has opened a substantial political `window’ that happily coincides with the sun shining on the European economy. The Temporary Eurobill Fund offers a modest, technical but concrete step that can be expanded progressively into a financial, economic and political structure if circumstances develop propitiously. If they do not, then it can easily be wound down again ad extinguished within two years.

This author has developed the TEF plan over several years – now  comprehensively updated in 30 FAQs

 

Full article available for Friends and consultancy clients


22 February 2018

Building the Brexit castle on a foundation of quicksand: 138th Brussels for Breakfast – CPD Notes

The Brexit shambles in Britain contrast starkly with the neat negotiation strategy in Europe. The EU would welcome back - with relief - UK's membership, but it is moving fast towards new horizons of reform and it has signalled it won't wait for anyone that isn't on board and fully committed. 

Highlights from the “Brussels for Breakfast” meeting

We are now down to 401 days until we go over the Brexit cliff and the UK feels no nearer to laying out the details of what it wants. Perhaps this week’s Cabinet away day will finally reach conclusions but speeches from the Foreign Secretary and DexEU minister provided little clarity – especially after 62 MPs wrote to the Prime Minister setting out their own red lines.

For the financial services industry, the deadline for action is drawing perilously near. But what action? The volume of calls from across the Channel to get on with applications for banking licences grows louder with comments that only a handful of licence have been issued. But it seems that many are under discussion and what about firms that simply want to extend their existing activities? Nonetheless, it was accepted that there would be capacity constraints among EU regulators if there is a last minute rush. [...]

Key items of the rest of the month:

The foundations for the second phase of the Brexit talks have proven not to be very solid. Inspired by UK’s Brexit Secretary David Davis’ motto that “nothing is agreed until everything is agreed”, the top EU Article 50 negotiator Michel Barnier warned British officials against their backtracking in “substantial” agreed principles and flagged the risk for the UK of crashing out of the EU without a transition period in case that the deals achieved weren’t rapidly transposed into law – a major concern for MEPs. The UK Prime Minister has found battle lines in all fronts, with MPs at home calling for more reforms to her Withdrawal Bill. Theresa May faces also distrust among business, with more than two-thirds of companies not confident in Government's ability to negotiate with the EU.  

Under the negotiating directives for transitional arrangements adopted in January’s Council meeting and published by the Commission, Britain will be bound by EU laws but have no say over them, a friction point that May’s administration has tried to fight and that could threaten transition talks. The EU’s stance in this regard might have activated the ‘hard Brexit’ option: senior officials told POLITICO that the British PM plans for an ‘immediate’ break with the EU in trade or financial services after withdrawal, which has raised the EU27’s fears of a ‘bonfire of regulations’ that could undermine the bloc’s economy after divorce and resulted in the publishing of a strategy paper that threatens with sanctions in case of a regulatory ‘race to the bottom.’ Dispute settlement remains a key sticking point for the future trade deal, a Commission’s internal document suggested: a feasible option could be ‘docking’ with the European Free Trade Association (EFTA) Court as a dispute resolution body, wrote POLITICO’s Georgina Wright. [...]

Our Brussels for Breakfast and CPD notes are available for Friends 

Full article including our monthly round-up of key items in Brussels available for consultancy clients


2 February 2018

European Systemic Risk Board (ESRB) on Sovereign Bond Backed Securities (SBBS)

The ESRB has just published its long-awaited reports (Part I and Part II) on SBBS. They are exhaustive and thorough reports on an intellectually attractive idea that was generated in 2011 by the consequences of the Great Financial Crash. The plan is designed to create a new class of “safe assets” via an elegant securitisation of euro area government bonds. The SBBS would be held principally by banks as an alternative to direct holdings – especially of the banks’ domestic government bonds.

The reports analyse in great detail the motivation to create such securities and highlight the necessary condition of often-contentious regulatory change that would be required to make them economically viable. The reports also highlight the usual problem for the tranches of securitisations: who buys the risky, junior tranches?

Perhaps the real problem for SBBS in 2018 is that the concept was originally designed to mitigate a narrow – though important – problem. The arguments today for the much wider solutions offered by a Temporary Eurobill Fund (TEF) remain intact: a safe asset; direct contribution to financial stability; global scale issues of great liquidity; flexible and progressive market discipline to enhance economic governance; and last – but certainly not least politically – a genuine fusion of euro area citizens’ economic interests into a `European asset’ that can be a core savings instrument for all. [...]

Full article available for Friends and consultancy clients


17 January 2018

“How to reconcile risk sharing and market discipline in the euro area”:  Some observations on the new Vox paper

In this fallow period for policy-making while Europe waits for a new German Government (and may yet have to wait even longer for a strong Italian Government), it is welcome that an illustrious group of Franco-German thinkers should publish a Vox paper[1] that outlines a complete, coherent strategy for the Eurozone. As the economic sun shines on Europe – at long last – this is indeed the time to fix the roof!

The authors set out three sound reasons for believing the binary choice between more risk sharing/better incentives is false. The authors specify six areas for reform and this blog reflects on three of them.

My observations link are from the perspective of a market participant who has published a plan for a Temporary Eurobill Fund.


10 January 2018

Graham Bishop elected Vice Chairman of the European Movement (UK)

We are delighted to announce that Graham Bishop was elected Vice Chairman of the European Movement (UK) in December, after being re-elected to serve a third term on the European Movement’s National Council. He was also re-elected recently to the Board of the Kangaroo Group.


9 January 2018

2018: the year of the make-or-break for the Brexit talks

The start of the New Year marked the entry into force of the EU's revamped rules for financial services, MiFID II, and re-set in motion a big headache for European regulators and firms: Brussels and London will have less than 10 months to ink a trade deal and the terms of their new relationship. [...]

Our Brussels for Breakfast and CPD notes are available for Friends 

Full article including our monthly round-up of key items in Brussels available for consultancy clients


 

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